Iran sanctions cause new oil shock

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PAIN AT THE PUMP: Prices hit a record high this month, putting global growth at risk, says Richard Lein

TIGHTENED sanctions by the West have yet to dissuade Iran from pursuing its controversial nuclear programme but have caused an oil price spike that could trigger a global recession.

Oil prices hit a record high in euro terms earlier this month and analysts now believe they may have already dragged the eurozone into recession.

New sanctions by the United States and European Union against Iran have ratcheted up tensions and the price of oil as traders worry about the risk of hostilities, including an attack by Israel on Iranian nuclear facilities.

US President Barack Obama conceded on Friday that tensions over Iran were "adding a US$20 (RM62) or US$30 premium to oil prices", which are up some 20 per cent since December.

International Monetary Fund chief Christine Lagarde warned earlier that any interruption in oil supplies from Iran could increase oil prices by a further 20 to 30 per cent and cause an economic shock.

"A sudden and brutal rise in the price of oil" from Brent crude's current levels of around US$125 a barrel "would have serious consequences on the global economy" until other oil-exporting nations were able to bridge the gap, she said.

Iran has threatened retaliation against the sanctions, including a possible disruption of shipping through the Strait of Hormuz, a Gulf chokepoint for global oil shipments.

Ernst & Young's Eurozone Forecast warned a spike in oil prices to a sustained level of US$150 a barrel would cause a recession of one per cent in the EU this year, double the milder 0.5 per cent contraction currently forecast.

"A new oil shock would hit an already fragile economy," said Marie Diron, senior economic adviser to the Ernst & Young Eurozone Forecast.

"With their budgets already squeezed by austerity measures and rising unemployment, many households" would likely be forced to cut back on purchases.

That would be a blow to businesses, which would also have to cope with higher fuel prices and would likely cut output and jobs, increasing the number of unemployed by around 500,000 according their calculations.

Industry group International Air Transport Association warned that  fuel prices were hurting airlines and that an increase to US$150 a barrel could push some into bankruptcy.

The price of Brent crude jumped in January when the EU said it would ban imports of Iranian crude and higher prices appear to have  pushed the eurozone back into recession.

Eurozone private sector activity fell more sharply than expected  this month, indicating that the 17-nation single currency area slid back into recession, according to Markit research firm's purchasing managers' index (PMI).

The composite PMI fell to 48.7 points this month after reaching 49.3 points  last month. Any score below 50 indicates contraction.

"The oil price and the weak trade environment were key drivers behind the fall," said Christian Schulz, senior economist at Berenberg Bank.

Chinese manufacturing activity also fell to a four-month low of 48.1 this month, according HSBC bank's preliminary PMI, adding to concerns about slowing growth in the world's second largest economy.

The price of Brent crude hit US$128.40 on March 1, the highest level since a peak of US$147.50 of July 2008. But with the euro having slid against the dollar, it reached a record of E94.65 (RM388) per barrel.

"Given the existing major debt issues facing beleaguered eurozone economies, the latest jump in oil prices adds unwelcome inflationary and balance of payments costs with imports of dollar-denominated oil," the International Energy Agency commented in its latest monthly report.

"Sustained higher prices risk further undermining the pace of global economic recovery," it added, while noting that prices have risen by 20 per cent since December.

The IEA estimates that exports from Iran could plunge by about 800,000 barrels per day to one million BPD in the second half of the year after the tighter Western sanctions go into force.

The high oil prices have clearly become a worry to Western governments. French Energy Minister Eric Besson said last week that France and other industrialised countries were considering releasing part of their strategic crude reserves to keep prices down.

Industrialised nations had dipped into strategic reserves last year to mitigate a rise in prices after Libyan exports dried up because of  the rebellion against long-time dictator Muammar Gaddafi.

However, IEA director Maria van Hoeven told Dow Jones Newswires this past week there has been no discussion of any coordinated release of reserves by industrialised countries, which is handled via the agency.

She said there was not currently any supply disruption that would justify a release.

Washington and Brussels believe the sanctions are beginning to take a toll on the Iranian economy, and Teheran last month agreed to revive talks between it and the P5+1 group of powers -- the five UN Security Council permanent members plus Germany.

As yet, no date or venue for the negotiations has been announced, and the previous round of Iran-P5+1 talks collapsed in Istanbul in January last year.  AFP

Motorists had better be prepared to pay more for petrol should the West decide to attack Iran. AP pic


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